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Modeling uncertainty: predictive accuracy as a proxy for predictive confidence

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Robert Rich
Joseph Tracy

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Abstract

This paper evaluates current strategies for the empirical modeling of forecast behavior. In particular, we focus on the reliability of using proxies from time series models of heteroskedasticity to describe changes in predictive confidence. We address this issue by examining the relationship between ex post forecast errors and ex ante measures of forecast uncertainty from data on inflation forecasts from the Survey of Professional Forecasters. The results provide little evidence of a strong link between observed heteroskedasticity in the consensus forecast errors and forecast uncertainty. Instead, the findings indicate a significant link between observed heteroskedasticity in the consensus forecast errors and forecast dispersion. We conclude that conventional model-based measures of uncertainty may be capturing not the degree of confidence that individuals attach to their forecasts but rather the degree of disagreement across individuals in their forecasts.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 161.

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Date of creation: 2003
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Handle: RePEc:fip:fednsr:161

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Keywords: Forecasting ; Time-series analysis ; Business cycles;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Söderlind, Paul, 2000. "Inflation Forecast Uncertainty," CEPR Discussion Papers 2499, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Christopher D. Carroll, 2001. "The Epidemiology of Macroeconomic Expectations," NBER Working Papers 8695, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Nicholas S. Souleles, 2001. "Consumer Sentiment: Its Rationality and Usefulness in Forecasting Expenditure - Evidence from the Michigan Micro Data," NBER Working Papers 8410, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  5. Batchelor, Roy & Dua, Pami, 1991. "Blue Chip Rationality Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(4), pages 692-705, November. [Downloadable!] (restricted)
  6. Dean Croushore, 1993. "Introducing: the survey of professional forecasters," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-15. [Downloadable!]
  7. Pennacchi, George G, 1991. "Identifying the Dynamics of Real Interest Rates and Inflation: Evidence Using Survey Data," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 4(1), pages 53-86. [Downloadable!] (restricted)
  8. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59. [Downloadable!] (restricted)
  9. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-35, September. [Downloadable!] (restricted)
  10. Cukierman, Alex & Wachtel, Paul, 1979. "Differential Inflationary Expectations and the Variability of the Rate of Inflation: Theory and Evidence," American Economic Review, American Economic Association, vol. 69(4), pages 595-609, September. [Downloadable!] (restricted)
  11. Lloyd B. Thomas Jr., 1999. "Survey Measures of Expected U.S. Inflation," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 125-144, Fall. [Downloadable!] (restricted)
  12. Francis X. Diebold & Anthony S. Tay & Kenneth F. Wallis, 1997. "Evaluating Density Forecasts of Inflation: The Survey of Professional Forecasters," NBER Working Papers 6228, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Bomberger, William A, 1996. "Disagreement as a Measure of Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(3), pages 381-92, August. [Downloadable!] (restricted)
  14. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April. [Downloadable!] (restricted)
  15. Bonham, Carl & Cohen, Richard, 1995. "Testing the Rationality of Price Forecasts: Comment," American Economic Review, American Economic Association, vol. 85(1), pages 284-89, March. [Downloadable!] (restricted)
  16. Lahiri, Kajal & Teigland, Christie & Zaporowski, Mark, 1988. "Interest Rates and the Subjective Probability Distribution of Inflation Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(2), pages 233-48, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Carlos Capistrán-Carmona, 2005. "Bias in Federal Reserve Inflation Forecasts: Is the Federal Reserve Irrational or Just Cautious?," Computing in Economics and Finance 2005 127, Society for Computational Economics. [Downloadable!]
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  2. Magnus Andersson & Lars Jul Hansen & Szabolcs Sebestyén, 2006. "Which news moves the euro area bond market?," Working Paper Series 631, European Central Bank. [Downloadable!]
  3. Stefania D'Amico & Athanasios Orphanides, 2008. "Uncertainty and disagreement in economic forecasting," Finance and Economics Discussion Series 2008-56, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  4. Jonas Dovern & Ulrich Fritsche, 2008. "Estimating fundamental cross-section dispersion from fixed event forecasts," Macroeconomics and Finance Series 200801, Hamburg University, Department Wirtschaft und Politik. [Downloadable!]
    Other versions:
  5. Clements, Michael P, 2006. "Internal consistency of survey respondents.forecasts : Evidence based on the Survey of Professional Forecasters," The Warwick Economics Research Paper Series (TWERPS) 772, University of Warwick, Department of Economics. [Downloadable!]
  6. Fushang Liu & Kajal Lahiri, 2006. "Modelling multi-period inflation uncertainty using a panel of density forecasts," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(8), pages 1199-1219. [Downloadable!]
  7. Carlos Capistrán & Allan Timmermann, 2008. "Disagreement and Biases in Inflation Expectations," CREATES Research Papers 2008-56, School of Economics and Management, University of Aarhus. [Downloadable!]
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  8. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Clara Vega, 2007. "Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets," CREATES Research Papers 2007-20, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  9. Laura Veldkamp, 2003. "Learning Asymmetries in Real Business Cycles," Working Papers 03-21, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
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